THE events of MH370 and MH17 have soured the operations of Malaysia Airlines (MAS), where the extent of the damage from these events on its financials will be more accurately shown when the airline reports its quarterly figures next week.

While these tragedies have led to MAS’ major shareholder, Khazanah Nasional Bhd, offering to not only take the company private but also undertake what appears to be an exhaustive overhaul of the airline’s operations, the problems at MAS have been simmering for a long time now.

The airline has been losing money for some time, and previous turnaround plans, in hindsight, were akin to applying bandages when major surgery was needed. Previous turnaround plans might have just delayed what needs to be done now.

But all gloves are off with the upcoming overhaul when it comes to salvaging MAS. Political will appears to be there, judging from comments made by the Prime Minister and the airline will undergo a big transformation on how it operates.

Lots of public funds will be spent to make things right at MAS, and it will start with the RM1.4bil takeover of the airline. The overhaul of MAS should be more than just cosmetic or quick fixes.

While the airline’s revenue will surely slump, MAS also has to deal with its cost. As it stands, experts have pointed out that the size of its cost structure is one that supports a far larger network than what MAS currently operates.

Tackling costs won’t be easy also, given that it is a government-linked company (GLC) with social obligations. In fact, MAS, like its other GLC brethren, has commitments that most private companies just don’t have.

Will the overhaul of MAS take into account just how far it needs to go to remove a certain portion of such obligations, and if it is happening in MAS, are other GLCs too shouldering the same kind of burden as MAS is?

It has been long suspected that the airline has been losing lots of money due to leakages and some have even alluded to political interests having their fingers in the pie.

Khazanah should undertake a thorough review of the supply chain, and conduct forensic accounting if needed to ensure corruption is weeded out of the company. MAS needs to make sure that the services and supplies bought are at market rates and of a fair value.

For Khazanah, it needs to revisit its GLC transformation programme and see whether it has been as effective as what the market expected it to be. There has been a series of colourful books and manuals issued, and among them, the red book. Just how far have the initiatives of the red book, which deal with procurement, been successful in reducing costs?

But the need to ensure support for its social obligations can be tough on a GLC. For one, if the contracts given or services and goods acquired are inflated beyond an acceptable amount, then it will just balloon cost. Social obligations that relate to the need for support to help companies grow in scale is understandable, but not handouts.

Even Petroliam Nasional Bhd president and chief executive officer Tan Sri Shamsul Azhar Abbas has inferred that there is pressure from Government interference and the need to back vendors that charge quite a bit above market prices.

If such pressure is existent in the national oil company that is different from other GLCs, then one can hypothesise that such pressure is prevalent among GLCs.

There needs to be a balance between social obligations and market value. GLCs cannot go on supporting programmes at inflated costs if the companies they are supporting have not shown improvements or are detrimental to their own well-being. This is because doing so will have a telling effect on the performance of the companies.

Should its costs become inflated as a result of such support, then there could be implications on the performance of the GLCs. For one, investors will make that distinction and attach a lower market multiple for GLC companies compared with its private-sector peers. Some will say that it is already being seen in some GLCs.

A QUESTION OF BUSINESS By P. GUNASEGARAM p.guna@thestar.com.my

IT must be great to have so much firepower at your fingertips. But it is also a huge responsibility. How do you get your target and keep it intact at the same time? It’s the old question of having your cake and eating it too.

That’s a dilemma that not just Permodalan Nasional Bhd (PNB) but many government-linked companies (GLCs) face. They have the money to buy over property companies but if they don’t do it right, they stand the risk of losing the people behind these companies.

If the worst happens the staff leave, the company is unable to undertake its projects, quality of houses and other developments drop, launches get less imaginative, public perception deteriorates, and, ultimately, value gets destroyed.

By seeking to own the golden goose body and soul, it is sometimes killed. Occasionally, there is in the corporate world a very thin line between protecting and enhancing your investments and making a wrong move which may send their value plummeting down, if not immediately, in time.

The latest episode (see our cover story this issue) has raised eyebrows not least because of the manner in which PNB has made its bid for one of most respected and admired property companies in Malaysia, SP Setia.

PNB already has about a 33% stake in SP Setia but is seeking to raise this stake to over 50% by offering RM3.90 a share, about an 11% premium over the closing price before the announcement of its notice of takeover. It offered 91 sen per warrant, a premium of nearly 100%.

It has had its stake of just under 33%, the point at which a general takeover offer is triggered under the takeover code, since 2008 but pushed this to just over trigger point on Tuesday and announced its intention for a takeover the following morning.

The offer is conditional upon PNB getting control of SP Setia. PNB also announced its intention of keeping SP Setia listed by ensuring a shareholding spread even if it got more than 90% of the offer shares.

Initial calculations based on 75% control and acquisition of all warrants indicate that the takeover could cost PNB over RM3 billion, a lot of money for most private investors in Malaysia but a mere drop in the ocean for PNB which has over RM150 billion under management.

It’s the second largest fund manager in the country after EPF which is twice as big with over RM300 billion in funds. But PNB is probably the largest equity investor in the country because of a much higher proportion of funds invested in equity. There is hardly a major listed company in Malaysia in which PNB does not have a stake.

The big puzzle is why has PNB launched this takeover offer which could potentially affect adversely the value of its quarry? What was PNB fearing? Was it just a matter of increasing its stake in a depressed market which undervalued SP Setia’s assets or was there something else? And why did it not consult with senior management and shareholders even after its notice of takeover?

At this stage one can only conjecture on the answers and make educated guesses.

But first, what’s wrong if PNB took a majority stake? Previously SP Setia had PNB as a major but not a majority shareholder. PNB did not intervene in management and had two board representatives. If the SP Setia board put up a proposal for shareholder approval, PNB cannot by itself stop it if other shareholders supported it. They include the Employees Provident Fund (EPF) with 13.4%, SP Setia president and CEO Tan Sri Liew Kee Sin with 11.26% and Kumpulan Wang Amanah Persaraan or KWAP with five per cent.

One must still note that the government-linked funds or GLFs already control over 51% of SP Setia. But with PNB alone poised to take over a 50% stake, feathers are being ruffled and questions are being asked as to what that means.

What would have been the ideal situation for SP Setia? Four factors would have contributed. An independent management, a good board which represented all parties, strong minority shareholders, and a diversified institutional base so that no shareholder dominated. The first three are pretty much in place but the fourth was not achieved because PNB had since 2008 been holding a stake of just under 33% and with two other GLFs, the stake came to over 50%. But was there a way of dispersing shareholding?

One deal being negotiated, it was reported, was for Sime Daby, a PNB company, to take a 20% stake through the issue of new shares in exchange for land banks. If it had come through, it would have helped to dilute PNB’s shareholding. Still, Sime is related.

The underlying problem is this. GLFs and GLCs have lots of money and not many places to put them in. Good companies attract their attention but if they take control, and especially if they take management control as well, the move can destroy value.

Some of PNB’s property purchase and privatisation acts in the past have not been particularly successful, if at all. The major reason is key staff leave after GLCs take control. That’s a phenomenon that’s happened quite a few times.

So far, PNB’s stake in SP Setia had not been a problem. PNB had its two board representatives and it was quite satisfied with its stake. A balance seemed to have been reached with senior management, especially Liew who is also a major shareholder.

But that has been thrown askew with PNB’s latest move. Part of the solution will be to convince the market that there will not be management interference unless things go wrong. But the only assurance of that is if stakes are far below 50%, perhaps not more than 30%.

PNB is primarily a passive investor. Thus its motivation should not be to stop dilution of its shareholding or moves to widen shareholding among companies it owns. Control should not be its primary aim.

Instead, it must focus on getting best value for its current stake, which may well be achieved by continuing to be clearly a passive investor. That’s better than having a bigger stake in a less valuable company. Perhaps it could have put its RM3bil in other investments. But it looks like it’s a bit too late for that.

l Managing editor P Gunasegaram is plainly perplexed by PNB’s bid to take over SP Setia. Any explanations?

Leave it to the real businessmen !

ON THE BEAT WITH WONG CHUN WAI

Questions are being raised as to why Permodalan Nasional Bhd is making a takeover bid on SP Setia, a reputable housing developer.

IT may not have caught the attention of ordinary Malaysians but it is a big story that is now the hottest topic among the business community.

Housing developer SP Setia is a reputable name that many Malaysians are familiar with because of the quality homes it builds.

It has also ventured outside Malaysia and made its presence felt in Vietnam, Australia, Singapore and even Britain.

The man at the helm of SP Setia is 52-year-old Tan Sri Liew Kee Sin, a down-to-earth bank officer-turned-developer.

Some would even say SP Setia is Liew Kee Sin and Liew Kee Sin is SP Setia.

Fiercely proud of his humble beginnings in Johor – his father was a lorry driver – the Universiti Malaya graduate wanted to study law but was offered economics instead.

SP Setia started off as a construction company – a syarikat pembinaan as conveyed in its initials SP.

Liew turned it into a big-time property developer when he injected two projects – Pusat Bandar Puchong and Bukit Indah Ampang – into the company in 1996.

Liew has faced many challenges but he is now looking at the biggest fight of his career – one that is heavily staked against him.

Permodalan Nasional Bhd (PNB), the country’s largest asset manager and owner of 33% of SP Setia, is making a bid to take over the company.

On Friday, PNB bought an additional 23.5 million shares in the open market for RM3.868 a share, just 3.2 sen shy of its proposed takeover price of RM3.90.

PNB, with a RM150bil cash chest, is seeking to raise its stake to over 50% with its RM3.90 offer, which is about an 11% premium over the closing price before the announcement of its notice of takeover.

Such a takeover bid is not unusual in the corporate world, and more so when Liew only has an 11.3% stake in the company.

Other major shareholders of SP Setia include the Employees Provident Fund (EPF) with 13.4%, Kumpulan Wang Amanah Persaraan with 5% and over 40% are in the hands of minority shareholders.

But the manner in which it was done has led to much unhappiness.

Despite having two PNB directors on the board, there was no courtesy of a verbal notification prior to the takeover move.

The general offer notice only reached the company on Wednesday at 8.30am, just before the market opened.

Some may argue that the element of surprise was for strategic reasons but there was still no call even after news broke out of the takeover bid.

In a nutshell, relations have been strained.

PNB has issued a statement saying it wishes to maintain the management team, which is known to be fiercely loyal to Liew, but no one is sure how events will unfold in the coming days.

However, questions have been raised as to why PNB is wanting to take over a company that is being run competently instead of remaining as a passive investor that is satisfied with good investment returns.

If the Government is actively pushing for the private sector to be the engine of growth, we have the right to ask why the GLCs are competing with the private sector.

Widening its shareholding base is one thing but controlling private companies will lead to speculation over its agenda, cause unnecessary concerns as well as send the wrong signals.

The whole exercise will cost PNB RM3bil, which is chicken feed to them, but there are political and economic ramifications that the country’s leaders should take note of.

It may not be such a grand scheme in the end for PNB if Liew decides to leave SP Setia and set up his own venture, and gets his senior management team to join him.

PNB may then find itself in a spot even after gaining control of the company.

No one would believe that there would not be interference from PNB, so let’s not kid Malaysian investors.

Civil servants who manage public funds should leave the business of running businesses and making money to the real businessmen.

Is it time to settle?

OPTIMISTICALLY CAUTIOUS By ERROL OH

IT was only this week that most of us found out about the efforts to settle all lawsuits between Tan Sri Tajudin Ramli and several government-linked companies (GLCs), including a few listed entities. According to Minister in the Prime Minister’s Department Datuk Seri Nazri Abdul Aziz the Government had been mulling over the out-of-court settlement for the past six months. It was reported that Nazri sent a letter to the GLCs this month, informing them that the Government and the Finance Ministry had agreed to settle all civil claims against Tajudin.

However, it appears that the possibility of a “global settlement” of the suits have been floating around for longer than half a year.

Last December, the now delisted DFZ Capital Bhd uploaded on the Bursa Malaysia website a circular by Singapore-listed Esmart Holdings Ltd, which was acquiring a 75% stake in DFZ. In discussing the material litigation of Atlan Holdings Bhd (the vendor in this transaction), Esmart touched on the developments in a particular case and said: “In view of the global settlement in respect of all suits concerning Tan Sri Dato’ Tajudin Ramli (TSDTR), the said matter is now fixed for mention on Jan 12, 2011.”

A similar reference “the global settlement in respect of all suits involving TSDTR” popped up in the notes to Atlan’s quarterly report for the period ended November last year.

Atlan’s legal entanglement with Tajudin is a legacy issue arising from its 2004 purchase of a 32% block of shares in Naluri Corp Bhd from Pengurusan Danaharta Nasional Bhd. Tajudin lost control of Naluri following the Asian financial crisis.

A more interesting bit of information surfaced in Axiata Group Bhd‘s quarterly report for the period ended Dec 31 last year. In providing an update on its material litigation, the company said: “The Court has requested the parties to mediate and TSTDR has proposed a global settlement for all the cases involving TSTDR. The parties have since agreed to mediate the pending disputes.”

Axiata appears to be one of the GLCs whose lawsuits with Tajudin are likely to be withdrawn following the Government’s agreement with Tajudin. Khazanah Nasional Bhd is a 39% shareholder of Axiata, whose subsidiary Celcom Axiata Bhd was once among Tajudin’s prime businesses.

Malaysia Airlines (MAS) is another former Tajudin asset that’s now a part of the Khazanah stable. Not surprisingly, the national carrier too has legal disputes with him. However, to date, MAS has yet to say anything about the change in status of its suits involving Tajudin.

So why haven’t Atlan, Axiata, MAS and TM made any announcements about the global settlement? Atlan and Axiata have disclosed the development in the notes to their financial statements and quarterly reports, but this is still a step away from highlighting the information.

It has been established that these companies’ lawsuits involving Tajudin are indeed material litigation, and Bursa Malaysia’s listing requirements include “the commencement of or the involvement in litigation and any material development arising from such litigation” among the examples of events that may require immediate disclosure.

Of course, there’s room to argue that the global settlement is very much work in progress, with many details yet to be worked out. However, shouldn’t the investing public be alerted when there’s a proposed global settlement on the table and it may result in the conclusion of several suits with billions of ringgit at stake?

Nazri was quoted as saying there was no special deal between Tajudin, the Government and the GLCs for the parties to agree to the settlement of the suits. He added that it was up to the parties involved to decide what to do next. “It is their right if they want to proceed with their court case,” he said.

As listed companies, they are obliged to take into account the interests of minority shareholders as well. It’s impossible to please every shareholder, for sure, but whatever the decision of each company, the board and the management need to be transparent and consistent, and their rationale ought to be persuasive. If a company decides to drop a lawsuit it has filed, particularly one that seeks to address big losses, it owes shareholders an explanation.

For example, an Axiata subsidiary, Rego Multi-Trades Sdn Bhd, commenced proceedings in 2005 against Aras Capital Sdn Bhd and Tajudin for amounts due to Rego pursuant to an investment agreement with Aras Capital and an indemnity letter given by Tajudin. In turn, Tajudin filed his defence and instituted a counterclaim to void and rescind the indemnity letter and claim damages. Said Axiata in annual report 2010: “The board of directors, based on legal advice received, are of the view that it has good prospects of succeeding on the claim and successfully defending the counterclaim if the same were to proceed to trial.”

Similarly, both TM and Axiata have expressed confidence that they can put up a winning defence against Tajudin’s RM13.4bil counterclaim.

Perhaps it’s good for everybody or at least, for most people if the Tajudin-related suits are settled out of court. If that’s so, the listed companies should have no problems presenting that case to their shareholders.

Executive editor Errol Oh has just realised that we often overlook the listed companies’ disclosures on material litigation.